Is the American body politic permanently paralyzed? Indiana's Evan Bayh, resigning from the U.S. Senate in disgust, correctly identified most of the symptoms. There is gridlock in Congress, and it is most troubling in the Senate. The senior figures there are supposed to be able to take advantage of their six-year terms and develop a long view of the national interest—not like the weather vane of the House of Representatives, whose members face election every two years. Then there's the unproductive partisanship from the wing nuts on both sides of the political spectrum whose venom spews continuously in the news media, especially cable news, talk radio, and the blogosphere. They would be mildly entertaining were it not that America is in the grip of a severe financial crisis.
The only gleam of hope in this dark scene is that Democrats and Republicans have agreed to take part in a bipartisan commission to tackle the deficit. Established by President Obama's executive order (weeks after its rejection on a Senate vote), the commission has no executive power, but it does have two good men as cochairs—Wyoming's Alan Simpson, a former Senate leader, and Erskine Bowles, a centrist Democrat from North Carolina.
The chasm the commission is invited to bridge is wide and deep. One side wishes to slash taxes and shrink public services, following its belief that government programs are wasteful, bloated, and inefficient. The other side just as strongly believes it is necessary to increase public spending on social and economic needs, apparently heedless of the fiscal condition of the country.
Meanwhile, we are lurching toward a financial crisis that is well understood by the public. In a recent poll, 93 percent of respondents said they are concerned by the growing deficits; 59 percent are "extremely" concerned. The public has come to understand what excessive debt means on a personal level, given how many people have mortgages that exceed the value of their homes and credit card lines that are beyond their capacity to repay, particularly if their income goes down. People also have come to understand how enduring personal debt can be and what it means for their economic future.
Meanwhile, the country's debt has reached record highs for peacetime. This fiscal year, the federal deficit is expected to top $1.6 trillion, an astounding 10.7 percent of gross domestic product (this is double the 5 percent incurred during Franklin Roosevelt's New Deal from 1933 to 1936). The deficits through 2015 alone are projected cumulatively to exceed $6 trillion. And, in contrast to the 1930s, today's deficit is not going to be financed by Americans; about half of it is financed abroad, mostly by China and Japan.
Just think, our tax revenues are adequate to cover just four budget items: military spending, health spending, Social Security, and interest on the national debt. Every other program has to be covered with borrowed funds. This includes unemployment compensation, homeland security, support for state and local governments, federal outlays for higher education, satellite and manned space missions, the National Science Foundation, low-cost housing, infrastructure expenditures, the cost of our judicial and penal systems—the list goes on and on.
Let us also not forget that we still will have to cope with large increases in entitlement spending as our population ages and healthcare costs mount. So the long-term fiscal crisis will be even more severe. The administration's own projections reveal large, persistent deficits even after the economy has returned to full employment. Our cumulative national debt is estimated to climb as high as 140 percent of GDP by 2030, up from 50 percent just a few years ago. If we fail to act in response to these deficits, we face the dangers of a collapsed dollar; of foreigners who may stop buying treasury bills; of soaring interest rates that will constrain our economy and require 7 percent of our entire economic output to be paid as interest to debt holders; and of a decline in public services.
The dangers, then, are manifest. The only question is whether our political leadership will act decisively before the financial markets force it to. Alas, there are no fiscal rules and no political will to control spending on Capitol Hill, where every special-interest group supported by lobbyists seems to be nourished. Where is the leadership necessary to protect the future of America—including its fiscal future—through a judicious balance of tax increases and spending? Where is the capacity that President Reagan and House Speaker Thomas "Tip" O'Neill demonstrated when they compromised on a deal to save the solvency of Social Security? Where is the inspiration of President Clinton, who introduced two budget deficit reduction programs during his terms that involved both higher taxes and cuts in expenditures?
Both blades of the scissors—cost savings and higher revenues—have to be used. We'd get higher revenues on the same tax base from an economic rebound if there was one, but so far the recovery is limp. The country has been dealing with the excessive accumulation of private debt and public debt, and we probably have five or six more years of de-leveraging in store. To date, what we have achieved is to move liabilities from the private sector to the public balance sheet, effectively burdening tomorrow's taxpayers.
Now, this was done to save the financial system at the core of a functioning economy, and it was urgently necessary (if badly applied). But if we do not deal with the issue of excessive debt, it is difficult to project strong, sustainable, organic growth anywhere close to the rates of the past 50 years.
Politicians in Congress talk the talk about putting the United States on a stable fiscal footing. But they must recognize we are just beginning the process of balance-sheet repair. Over the next decade, the administration projects total federal spending of $45.8 trillion and tax revenues of $37.3 trillion, creating an astonishing cumulative deficit of $8.5 trillion. How will we reduce these massive deficits without big cuts in existing government programs or stupendous tax increases?
The forecast shows only the most modest improvement in the deficit over the next five years. Even that will come only if the United States returns to sustained growth in the range of 3 percent annually. But the government will be forced to enter the bond markets to borrow the $8.5 trillion projected deficit. We can only imagine how much higher interest rates will be as a consequence and how much harder it will be for private companies to issue debt of their own, given the crowding-out effect the dominance of the federal government as a borrower can have on financial markets.
The demographics are intimidating. At age 65, Americans will live for an average of another 18 years. The government now subsidizes each person above that age by an average of roughly $25,000 a year, made up of almost $14,000 in Social Security and $11,000 in Medicare. This will simply be unaffordable without major tax increases that would roughly double the tax burden from the average levels of the past several decades. The alternative is draconian cuts in programs.
Some will have to be made. We have drifted into an entitlement society. We will have to review the affordability of the Obama initiative of tax cuts and income transfers to low- and middle-income households. We will surely have to review the tax code and remove many of the special tax breaks that benefit special-interest groups at the expense of the nation's revenues. We will have to gradually raise tax rates for the well-to-do, even for those who earn less than the $250,000 threshold the president established in his political campaign. Given the increasing longevity of the population, we may have to correlate Social Security benefits and Medicare to wealth and change the way doctors are paid by Medicare to discourage them from performing unneeded and expensive procedures. Unnecessary programs will have to be reviewed and some abolished. The level and nature of our military expenditures will have to be reduced.
Without dramatic changes such as these, the cost of government will continue to dwarf revenues by staggering margins. Unless we address these painful issues, we are likely to stumble into yet another financial crisis. Unless we focus on our debts and our deficits, it will be impossible for the United States to achieve the twin goals of full employment and GDP growth while simultaneously reducing deficits to a manageable level. We cannot forget that these deficits are occurring on the eve of the retirement of the baby boomers, which will trigger further trillions of red ink. And that is why so many forecast that GDP growth for the remainder of this decade will be slightly more than 2 percent, by far the lowest in the decades since World War II.
None of the imperatives will be politically popular unless our leadership can persuade the country of how necessary this is.
We simply have no choice but to think about programs that will give us the chance to gain control of our economic future. It will require real leadership and inspiration to persuade people to do what they know they have to do, even though they instinctively won't like it.
Our political leadership—both parties—is evading these central budgetary problems. Washington keeps fighting for narrow partisan advantage while critical national problems remain unresolved. So far, the politicians have failed to explain how we are going to address our future debt and accept the limits of what the federal government can do. If they fail, we will be saddling the young with huge debts and immense taxes, and the American ethic of believing in a better future for our children will be in jeopardy.
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